In the priorities of the reformers in Russia the privatization of state
enterprises was near the top, perhaps only surpassed by the decontrol of prices.
There could not be a market economy until the preponderance of economic
enterprises had the incentives and the autonomy to achieve efficiency.
This could not be achieved until the enterprises were privately owned and
managed.

In achieving a transfer of control of the enterprises from the Communist Party
network there were many considerations and objectives:

to gain revenue for the new non-communist State for use in program to
alleviate the socio-economic distress accompanying the change in economic
systems

to create competition in industries

to promote the restructuring of the enterprises for the sake of improved
efficiency

to give the worker-citizens of Russia some ownership in the enterprises
that had been theoretically theirs but in actuality never were before.

to time the transition of enterprises so as to reduce the disruptions
in the industrial economy

to allow for the movement of the workforce from the overstaffed state
enterprises into new market enterprises

to open up sources of new capital for the modernization and expansion of
the enterprises

to make it possible to bring in new management talent to the enterprises

Some of these objectives involved problems. For example, the matter of
getting as much revenue from the sale of state enterprises ran up against the
objective of creating competitive industries. Most of the state enterprises
had monopolies in their fields. The sale price of an enterprise would be
highest if it retained its monopoly privilege. But the monopoly privilege
would be bad for the economy in the long run. If the buyers of a state
enterprise monopoly paid the market value of the monopoly right those
buyers would thereafter only make a normal rate of return on their investment
while operating as a monopoly. The privatized monopoly would thereafter
need its monopoly privilege to just survive. Therefore the objective of the
privatization program should have been to sell the state enterprises without
perpetuating their monopoly.

The reformers, under the leadership of Yegor Gaidar,
did drastically reduce subsidies to state enterprises and cut the
the military budget by two-thirds in 1992. Gaidar also instituted
a high value-added tax. GDP continued to decline but
at a reduced rate.

Western economists attribute the ongoing and debilitating inflation
in the early 1990's in Russia
to the monetary policies of the dedicated Communist Viktor Gerashchenko
who was the head of the Central Bank. Given Gerashchenko's political
affiliations it would not be implausible that he would have deliberately
sabotaged the reform, but it appears that the sabotage was not deliberate.
Instead the inflation was generated as a result of Gerashchenko's coverage
of the deficits of the state enterprises. He did not print up money to
cover those deficits; instead he granted the enterprises accounts at the
Central Bank. This had the effect of creating checking account money and
generated the same inflation as the printing up of paper money would have.
As the prices rose so did the deficits of the state enterprises and
hence the size of the accounts Gerashchenko had to issue them. This process
led to hyperinflation. Because pensions were
not indexed the hyperinflation led to the pauperization of the retired
people of the country.

When Gerashchenko was replaced at head of the Central Bank the rate of
inflation was brought down from thousands of percent per year to about ten
percent. Later, as a result of political bargaining between the President
of Russia, Boris Yeltsin, and the legislature, the Duma, Gerashchenko was put
back in charge of the Central Bank.

Yegor Gaidar, as the most prominent reformer, was blamed for the hyperinflation,
but his removal of price controls in itself would have resulted in only a
one time price rise. The chronic hyperinflation required an ongoing expansion
of the money supply. The monetary policy of the time was largely or completely
outside of his control. In his book, Days of Defeat and Victory, he makes
some comments that indicate that he accepted the necessity of creating additional
money to cover the deficits of the state enterprises.

Gaidar was removed from his prime ministership early.
He was not the iron general that Chubais was and was not equiped to
deal with the hurricane political movements of the time. He appears to be one
of the most humane and sincere figures to appear on the political scene in human
history. When he was asked by an interviewer years after he was out of the
political limelight what he wanted for the future Gaidar replied, "I want to be
a European without leaving Russia."

Yegor Gaidar died on December 16th of 2009 from fluid in his lungs resulting
from a heart failure. He was only 53 years of age. Although he was acting prime
minister of Russia only from June of 1992 to December of 1992 he was a key figure
in the transformation of the Russian economy.

The field of privatization in the early Yeltsin administration was put
into the able hands of Anatoly Chubais.

Anatoly Chubais

Chubais was widely recognized as a superb organizer. He was adept at
recruiting people of talent and allowing them to fulfill their functions.
Chubais understood the importance of not trying to micromanage or to second
guess on the work of his subordinates. Gaidar said of Chubais that he was
a friend whose loyalty was the supreme standard against which all others'
friendships were measured.

There was good reason for Chubais to be refered to as the Iron General.
One of Chubais' characterisitics was
to choose a goal and devote his full energies to the achievement of that
specific goal without being distracted by subsidiary goals.

Chubais decided that if there was to be any hope of breaking the power of
the Soviet bureaucracy and the Communist Party to which the bureaucrats owed
their allegiance there would have to be a mass privatization of State
properties. He set his objective to transfer as much property from state
control to private as possible and not to worry about whether the form of
the privatization was as good as possible. The new owners, whatever their
previous affiliation, would be supporters of privatization and would
oppose the old system and its power structure.

Chubais chose Dmitry Vasiliev to be a major figure in managing the privatization program.
Chubais set up a Russian bureau of privatization called GKI from its name in
Russian. Vasiliev was given the job of drafting proposed legislation for
privatization. It was a tough assignment because it had to be done very quickly
and the support for such legislation in the legislative body, the Supreme
Soviet dominated as it was by Communist Party appointees, was minimal. In other
words, Vasiliev was given an assignment of running through a minefield. The
task of getting the legislature to agree to any plan Vasiliev came up with fell
to Chubais.

To gain support among the directors of state enterprises Chubais agreed to
a provision that up to 40 percent of the shares of privatized enterprises would
go the management and workers of the enterprise. This was the first version
of the plan, call it Option 1. This was an attractive deal for the directors
of the enterprises but it fell short of giving those directors control of the
privatized enterprises. Chubais had to accept a revision, called Option 2,
which required that management and workers be allowed to buy 51 percent of
their enterprise at artifically low prices.

There was a major problem for any privatization program that required
payment for ownership shares. The problem was that very few people had any
resources for buying ownership. Although most Russians had accumulated
savings during the Communist Era but the buying power of those ruble savings
was reduced to insignficance by the inflation that followed the reforms.
Chubais came up with the voucher system to give all Russians some means of
participating in privatization. All Russians were entitled to a 10,000
ruble voucher which they could pick up at their local branch of the state
savings bank, Sberbank, upon payment of a token fee of 25 rubles. One hundred
forty four million Russians did so. At the time they were issued there were
no privatized companies to purchase shares in using the vouchers. The
voucher holders anxiously awaited the privatization process to start.

The voucher program created popular support for privatization. The
problem was that there weren't any state enterprises that were willing to
be privatized.

Chubais called in Western bankers to help with persuading an enterprise
to undergo privatization and to help organize the privatization procedures.
There was some urgency in the matter because the Supreme Soviet was making
noises about firing Yegor Gaidar as prime minister and replacing the top
leadership in the government. Any new government was not likely to
initiate privatization.

Chubais'
privatization team chose a Moscow cookie company as the target for
being the first privatization. The products of the company were familiar
throughout Russia so the case would be meaningful to the typical Russian.
Although the company had been founded in the mid-19th century its name had
been changed after the Revolution to Bolshevik Biscuit Factory so the
name itself had a certain publicity value.

The management was finally persuaded that privatization would be to their
benefit and would give the company access to new source of capital to upgrade
the equipment.

The day arrived for the privatization and there was a good turn out of
people seeking use their vouchers to buy shares in the Bolshevik Biscuit Factory, including many
employees and the management. Of course many people throughout Russian had
sold their vouchers long before there was the opportunity to use them.

The day after the privatization of Bolshevik Biscuit Factory, Yegor Gaidar
was fired and the new prime minister, Viktor Chernomyrdin spoke of privatization
as a crime. Nevertheless the privatization program moved along so that by
1994 nearly two third of the employment in Russia was in private or partially
privatized enterprises. Chubais, justly proud of accomplishing a nearly
impossible task, asserted that privatization was the first national
program since 1917 that was completed on time and achieved more that it
promised. Chubais' accomplishment was not so much privatization but instead
breaking the stranglehold that the network of Soviet bureaucrats and factory
managers and Communist Party functionaries had on the economy of Russia.
Privatization was a means to this end. That privatization did not achieve the
a just division of state property among the people of Russia was regretable
but unavoidable. Under the old system the workers were slaves in a system
that provided the bare necessities of life and allowed no freedoms. The
owners of the state property in the Soviet system was the Communist Party.
Under the program of the reformers the people got their freedom but little
else and the state property was taken away from the Communist Party per se
and even though in many cases the state propery remained in the hands of
the same people those people were now businessmen rather than Communist
functionaries.

Chubais later became the top executive of the Unified Energy System, the electric
power monopoly of Russia. Although he could be considered one of the Russian Oligarchs
of the 21st century he still maintains a role as a reformer. He has been trying to
revise the rate schedule for electricity. The revisions would involve Russia's large
enterprises paying more for electricity. In March of 2005 there was an attempt to assassinate
Chubais and a top leader in the Unified Energy System charged that the plan to charge
large enterprises more for their electricity was the motivation for the assassination
attempt.

Grigory Yavlinsky is a figure that could have been one of the most important in Russian
history. He was an important advisor to Mikhail Gorbachev and was working on his program
of transition for the Soviet system. He had written a plan for a 500 day transition of the
economy. Although relative cautious considering what actually took place in Russia in the
1990's it was considered too big of a step for the top leadership of the Soviet Union
to undertake. Yavlinsky's plan got tabled and before it could be reconsidered the table and
all else was swept away.